The Phillips Curve and the Philippines

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  • Topic: Inflation, Unemployment, Phillips curve
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  • Published : May 14, 2013
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The Phillips Curve and the Philippines
According to Cristeta B. Bagsic, the Phillips Curve “depicts the trade-off between inflation and unemployment rate” (“The Phillips Curve and Inflation Forecasting: The Case of the Philippines”). Nowadays, the relationship depicted by the Phillips curve is specified in the following equation: πt = πe – γ(UR – UR*) + v

where πt is the inflation rate, πe is the expected inflation, γ is a parameter, UR is the unemployment rate, UR* is the natural rate of unemployment (NRU), and v is a supply shock variable. So while the importance of the negative relationship between unemployment and inflation was obvious enough from the beginning, it is now also apparent that there are other factors that influence the behavior of the Phillips Curve. It is beyond crucial that these additional factors be understood and measured well, if they are to be used in maneuvering developing economies such as the economy of the Philippines.

Perhaps the most notable addition to the basic inflation rate-unemployment relationship is the expected inflation or πe. What can be taken from the equation above is that there is a positive relationship between this expected inflation and the actual inflation rate. This is because the expectations involved are those of workers who are assumed to be anticipating rises in the inflation rate. When expecting a rise in inflation rate (for whatever reason), workers tend to withdraw their labor and demand that their employers increase their wages. Assuming that their employers subsequently comply, the workers’ buying power would increase and cause aggregate demand to increase as well. This, in turn, would cause prices to increase which would trigger a rise in inflation – precisely showcasing the positive relationship that was pinpointed ("Economics Help - Helping to Simplify Economics" ). The next factor to be considered is the so-called Natural Rate of Unemployment. Bagsic sees this rate as the long-run unemployment...
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